The market crash of 2020 was like a holiday sale of amazing growth/recovery stocks for investors with enough liquidity. At the same time, it was a horror show for investors who were sitting on over-priced growth stocks and didn’t realize their gains on time. But one of the benefits of back-to-back market crashes is that you can learn from your recent investment mistakes and apply that learning toward the next crash.
That’s a positive way of looking at a potential 2021 market crash. The indicators for a forthcoming market crash are the same as they were when 2020 was ending. The market is not adequately correlated to the underlying economy, and the effects of government stimulus are fading. Even if what’s potentially about to come is a minor correction compared to 2020’s full-scale crash, you might want to consider selling your potentially dangerously overvalued stocks.
An overpriced holding company Several tech companies saw aggressive growth after the 2020 crash. With sectors like energy and finance not performing well enough, investor sentiment shifted in favour of the tech sector. Companies like AcuityAds Holdings saw their share price rise by well over 2,000% in less than a year. During the crash, the stock price of AcuityAds fell below $1 per share, and at its recovery peak, the price was slightly over $20.
That translated into an over 2,600% growth between the lowest and the best valuation. If you bought it at the right time and are still holding on to it, you might want to let go now. The company is dangerously overvalued. Its price-to-earnings is at 301 times, and price-to-book is about 44.2 times, which is higher than Shopify – the poster child for overvaluation.
If you sell now, you might still be able to profit from its insane growth. But if you wait till the next crash, there might not be a second chance.
A fresh overpriced stock Docebo (TSX:DCBO)(NASDAQ:DCBO) is a cloud-based Learning Management, and with so many students and employees stuck at home, Docebo’s star really took off during the pandemic. The company started trading on the TSX in October 2019 and grew over 430% in just over a year. Though 2021 hasn’t been generous to this tech company, the stock is down over 9%.
This overpriced stock, with negative forward price-to-earnings and a price-to-book of 35.4, might already be moving towards a correction. And if you are still holding on to it, you might consider selling it and cashing in the 2020 growth. The company shows promise and might do great once the pandemic is finally behind us and people actually start transitioning to LMS and remote learning (at a natural pace).
Foolish takeaway Selling overpriced stocks before a potential 2021 market crash arrives will also help you improve your liquidity position, and you can buy a new collection of undervalued stocks with excellent recovery and growth potential. But it’s important to distinguish between stocks you want to hold long term and companies that are only good for a short-term growth spurt.
The post Market Crash 2021? Sell These 2 Stocks While You Can! appeared first on The Motley Fool Canada.
Fool contributor Adam Othman owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends AcuityAds Holdings Inc., Shopify, and Shopify.
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